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Consider Using Tax-Prep Software

It can be easier, faster, and safer than the old-fashioned way.

Is it smart to use tax-preparation software such as TurboTax? Many people think so. It's becoming more and more common for people to use inexpensive software to prepare their tax returns. Now you can even bypass the software and prepare your return on the Internet for a modest fee. With these programs, you end up printing filled-out tax forms, which you sign and then mail in, perhaps with a check attached.

The main contenders when it comes to tax-preparation software are Intuit's (NASDAQ:INTU)TurboTax and H&R Block's (NYSE:HRB)TaxCut. If you're the type who loves filling out questionnaires and answering questions, you might actually enjoy (gasp!) preparing your taxes this way.

The software programs have many advantages:

You don't have to gather any forms; they're all in the program already.

You can revise and revise and revise and never have to get everything messy with correction fluid or an eraser. Enter your information, see what your tax liability is, and then you can make adjustments, playing out different scenarios to see which is the most cost-effective. (You might see that it's smart to realize some capital gains this year, for example.)

The software can assist you with decisions. It asks you questions and either makes decisions for you (regarding which forms to use, for example) or offers you some information and asks you to make a choice.

You can pay less attention to details. Once the program has certain information, it will make sure that it's carried over to and entered in all the required places. You don't have to worry about that.

Carryovers from year to year get taken care of automatically -- if you used the same program to prepare your return last year.

There are, of course, some disadvantages. The main one is that you have to trust the software, even though you're still the one responsible for your return. There's always a small chance that the software caused an error -- or that you provided an incorrect number and generated the error yourself. (Of course, even manually prepared returns may contain errors.)

Still, you might do well to at least try it once. At the very least, consider using a software program as a cross-check for yourself one year -- fill out your return the old-fashioned way, and then do it electronically. Compare the results, and you'll get a much better feeling for how accurate or helpful the software is. You can choose whether you want to file your original return or the computer-generated one, and you'll probably have an idea of which approach you want to use the following year.

Perhaps the most powerful advantage of tax-preparation software is that it lets you play "what if" games and plan more intelligently for taxes. Once you've entered the necessary information, change one variable and see how the bottom line is affected. See what will happen if you get a big raise at work, sell your house, or unload some stocks for a sizable capital gain. This can be enormously valuable if you think you might have to pay estimated taxes. Let the software help you figure out whether you have to pay estimated taxes.

When buying tax-preparation software, make sure that it contains all the forms you'll need -- such as tax forms for your state, for example. Verify that the software is compatible with your computer system. And if you buy the software early in the year, make sure you get an updated final version later in the year, so you're preparing your return incorporating the latest information and tax-code revisions.

You can read more about available software at the respective companies' websites -- and in many cases, you can get demo versions there as well. Keep in mind that you can often prepare your return online without even buying the software -- if you don't mind paying a fee online instead.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian